Outbreak Part 2: Change
I had the dubious honor of writing this commentary last time on January 27, just before things got really weird. In that piece, I posed two questions: Will it get worse? and Will it be disruptive? As the months drew on, my questioning changed. I wrestled with the question of permanence versus transitory behavioral changes. Will we ever shop in a grocery store again? Will we ever fly again? Will we ever go back to the office? I polled neighbors, friends, colleagues. Nobody had good, solid answers. Fortunately, the CFA Society of San Francisco hosted a video presentation last week given by MIT AgeLab’s Dr. Joseph Coughlin where he provided a superior framework for tackling that question. In addition to shedding light on consumer behavior (demand side), his framework also provides insight into corporate (supply side, potential investments) behavior. These insights provide highly useful inputs into portfolio decision making.
Is this crisis Transformational? Dr. Coughlin clearly points out it is not. It is Accelerating. Online shopping (ecommerce) has been steadily gaining share of wallet since the birth of online shopping. What this crisis did was accelerate that adoption. The graph tells the story.
Source: Bloomberg
Grocery delivery has been a niche service for years. Today, my local grocery stores are nearly empty, save for the workers filling customer orders to be delivered. Acceleration. Working from home has been an option for many for years. Overnight, it turned into a requirement. Acceleration. My wife is a second-grade teacher. Overnight, she turned into a tech-savvy (well…kinda), computer and distance learning expert. Acceleration. JC Penney filed for bankruptcy last Friday. The trend away from department store retail to boutique shops accelerated. The seeds for each of these trends had been planted long ago, but this crisis accelerated their adoption. Nothing was transformed.
What does this mean to investors? What are the investment implications?
In my last commentary in January, I stressed the importance of diversification to mitigate risk from any individual company. The crisis today has impacted all companies, all economies: there has been no place to hide. However, the impact has not been uniform. Some companies have benefited from the crisis while others have been disadvantaged. In particular, a few examples from our international and small-mid strategy will illustrate how our diversification has helped us capture some of the benefit from the acceleration in trends already underway.
In our international strategy, we have owned a dominant global rubber glove manufacturer for over a year. The crisis, with its dual impact of declining rubber prices on the back of decreased global demand and soaring demand for PPE (Personal Protective Equipment) has led earnings to outpace expectations. In turn, the share price has performed very well, making a new all-time high this past week.
Our small-mid portfolio owns a nationwide distributor of swimming pool equipment and supplies. The demographic of pool owners is the least likely to have lost jobs so far during this crisis, so their ability to maintain their property remains high. In his presentation, MIT AgeLab’s Dr. Coughlin pointed out the trend of “home as sanctuary” where people build more comfort and livability into their homes as they tend to spend more time in their “sanctuaries.” The stay-at-home orders accelerated—perhaps briefly—this trend, but did highlight people spending more time in their homes. Swimming pool companies benefit, cable TV providers benefit, internet service providers benefit. Our portfolios own companies that touch all these points and more.
The enduring lesson, trite as it is, is: Nothing is static. Curveballs come along. Investment horizons change. People age. Assess and adjust as necessary. The only constant is change. And change just sped up.
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